Recent German Developments in International Arbitration

Germany has a well-developed legal framework for international arbitration, modelled on the UNCITRAL Model Law and codified in the German Code of Civil Procedure (ZPO). Apart from mandatory provisions, parties to an arbitration may contractually agree to apply any institutional or other rules for the conduct of their arbitration proceedings. The German Arbitration Institute (DIS), for example, provides its own DIS Arbitration Rules, which were substantially modified in 2018 and offer internationally developed standards. Arbitration proceedings in Germany are also frequently conducted under other arbitration rules such as those of the International Chamber of Commerce (ICC), and internationally recognised guidelines such as those of the International Bar Association (IBA) or the Prague Rules (2018), which are often agreed.

Reform of the German arbitration law

In April 2023, as part of efforts to further strengthen Germany as a hub for commercial disputes, the Federal Ministry of Justice (FMJ) published a paper on reforming the German arbitration law to, among other things, take into account the revisions of the arbitration rules of many arbitral institutions, the advancing digitalisation of procedural law and the practical experience with Sections 1025 et seq of the ZPO.

The FMJ has identified 12 key reform projects to make the arbitration law more internationally competitive by simplifying formal requirements and modernising procedural rules, to strengthen specialisation and transparency and to make legal protection more effective. Such reforms include the following.

Informal agreements

In commercial transactions, parties shall be able to conclude arbitration agreements informally. This would correspond to the legal situation in Germany until 1997, and at the same time would implement Option II of Article 7 UNCITRAL Model Law in force since 2006. Currently, the arbitration agreement must either be concluded in writing or be documentable in some other way. In particular, this is intended to remove doubts about electronically agreed arbitration agreements, which may become relevant in connection with smart contracts in particular. The regulation would also lead to oral arbitration agreements becoming possible in commercial transactions.

Remote hearings

In the last three years, many oral hearings were conducted as remote or hybrid hearings, and this de facto development shall now also be legally anchored in the German arbitration law. In the future, arbitral tribunals shall have the right to hold oral hearings by videoconference, unless otherwise agreed by the parties. Furthermore, the recording of such videoconferences shall be regulated.

This in itself is nothing new, if the parties agree on a remote or hybrid hearing or have agreed on the applicability of the IBA Rules of Evidence 2020 or arbitration rules that provide for this possibility, such as the DIS Arbitration Rules. The provision in the DIS Arbitration Rules that the proceedings will be conducted by the arbitral tribunal once it is constituted gives the arbitral tribunal the power to decide whether hearings will be held in person or virtually.

However, the legal situation in the event of a disagreement between the parties on the holding of a virtual conference has not yet been clarified. According to an ICCA study published in 2022, the arbitral tribunal is expressly authorised to order a virtual hearing in only two of the 78 jurisdictions surveyed. Germany would therefore play a pioneering role in this respect in the future.

It has already been clarified that virtual hearings are not in conflict with the German procedural ordre public. However, when conducting remote hearings, arbitral tribunals should pay attention to compliance with the mandatory rules of the right to be heard and procedural equality of arms, which are part of the German procedural ordre public, and the violation of which may lead to the setting aside of the arbitral award. A violation of the fundamental right to be heard may occur if technical difficulties prevent one party from hearing the opponent’s arguments or presenting its own. In particular, a poor internet connection or malfunctioning equipment may cause such a problem. As a result, the tribunal must pay close attention to these aspects to avoid arbitral awards being challenged and set aside for violation of the right to be heard. In addition, parties are advised to bring relevant issues during the hearing to the attention of the tribunal, or they risk not being able to challenge the award on these grounds at a later stage.

The procedural equality of arms, which gives the parties the opportunity to present everything relevant to their case and to use all necessary procedural means to defend themselves against the opposing party, may be violated if a party does not have equal access to the technology necessary for a proper hearing. As this is closely related to the issue of the fundamental right to be heard, a violation also requires an actual impact on the party’s pleadings.

Remote hearings have thus proved to be a possible way to conduct the proceedings in a time- and cost-efficient manner. After this increased level of experience with remote hearings, the parties and arbitral tribunals will have to assess which form of hearing is suitable for each specific case. For this purpose, the factor of cost-efficiency will need to be weighed against, inter alia, factors such as the complexity of the dispute, whether witnesses and experts should be heard in person, and whether a face-to-face meeting offers better opportunities for settlement discussions. There could be a development that remote hearings tend to be scheduled in smaller and less complex proceedings, whereas in larger and more complex proceedings with many witnesses and experts, in-person hearings (possibly with remote elements) tend to take place.

Publication of awards

In the future, the publication of arbitral awards with the consent of the parties shall be regulated to promote transparency and the further development of the law.

Language

Arbitral awards and other documents from the arbitration proceedings shall be allowed to be produced in English without translation in setting aside and enforcement proceedings, and in proceedings for judicial assistance.

Conducting proceedings in English

In connection with another reform project of the German legislator, it shall also be possible in the future to conduct the entire setting aside and enforcement proceedings in English. The FMJ envisages that the federal states may set up specialised commercial courts to have jurisdiction over major international disputes in commercial matters. The federal states shall be able to entrust the commercial courts with jurisdiction for setting aside and enforcement proceedings. With the consent of the parties, proceedings before the commercial courts shall then be conducted entirely in English.

Jurisdiction

Under current German arbitration law, if an arbitral tribunal considers itself competent, this decision can be challenged before the state courts. However, negative decisions on jurisdiction cannot be challenged at present. In the future, not only positive but also negative decisions by the arbitral tribunal on jurisdiction shall be reviewable by the competent state court at the place of arbitration.

Validity

In applications for a declaration of the (in-)admissibility of arbitration proceedings, the state court shall also be able to decide conclusively on the existence or validity of the arbitration agreement.

Appeal mechanism

An appeal mechanism against final domestic arbitral awards shall be created for certain narrowly defined cases.

Rejection of application for enforceability

There shall be a clarification that if a court rejects an application for enforceability and sets aside the arbitral award, the matter may be referred back to the arbitral tribunal at the request of a party, which, in case of doubt, will also reinstate the arbitration agreement with respect to the subject matter of the dispute.

Foreign arbitration

Provisional measures shall be enforced in Germany even if the place of arbitration is in another country.

Appointment of arbitrators in multiparty proceedings

There shall be a dispositive provision for the substitute appointment of arbitrators in multiparty arbitrations if the parties on one side cannot agree on an arbitrator.

Ex parte orders

The admissibility of orders of the presiding judge of a civil court without hearing the opposing party (ex parte orders) shall be limited to orders in urgent cases.

In addition, the FMJ intends to further examine whether:

• to regulate the use of emergency arbitrators and/or the enforcement of interim measures ordered in an emergency arbitration with a foreign seat;
• to clarify the admissibility of dissenting opinions;
• joint senates of the Higher Regional Courts should be established across the borders of the German federal states; and
• the jurisdiction for judicial support proceedings should be transferred from the local courts to the Higher Regional Courts at the place of arbitration.

The suggestions of the FMJ paper are currently being discussed by the circles concerned.

Court decisions

The most important decisions of the national courts regarding arbitration come from the higher regional courts, as they are competent to enforce and set aside awards, and from the Federal Court of Justice (BGH) at the appeal stage. In line with the decisions of past years, the German courts continue to foster an arbitration-friendly environment that accepts and even favours arbitral proceedings.

A recent study enables statistical statements to be made for the first time on the basis of 630 setting aside and enforcement decisions. Due to the confidentiality of arbitration proceedings and in the absence of conflicting empirical data, these decisions are also one of the few indicators of the acceptance and spread of arbitration.

Arbitration clauses and arbitration pleas

German courts have upheld their broad understanding and interpretation of the validity and scope of contractual arbitration clauses.

If an arbitration clause provides that the details of the submission to arbitration are to be regulated separately, the legal effects of the absence of a corresponding provision are to be determined by interpreting the arbitration clause. In a recent decision, the Federal Court of Justice (I ZB 15/22) shared the assessment of the Hamburg Higher Regional Court, according to which an effective arbitration clause exists even without a separate agreement. Such declarations of intent may properly refer to procedural questions that are separable from the arbitration agreement itself and can be answered by recourse to statutory provisions.

If a party participates in the arbitral proceedings without complaint, it is generally precluded from raising the objection in enforcement proceedings that there is no valid arbitration agreement. The Federal Court of Justice (I ZB 31/21) held that the declaration of enforceability of the arbitral award made without an arbitration agreement does not violate public policy if no objection to jurisdiction was raised in the arbitral proceedings.

The fundamental right to be heard

A violation of the fundamental right to be heard is one of the most common arguments used by a party to challenge an arbitral award. However, German courts have held that only violations of a certain weight can lead to the setting aside of an award on these grounds.

It is standard practice for the German courts to point out that, as a rule, arbitral tribunals are to be presumed to have taken the party submissions into account, even if they are not explicitly mentioned in the award. It can only be concluded that the submission was not taken into account if the arbitral tribunal has not addressed “the essential core of the factual submission ... on an issue of central importance to the proceedings”, unless it was “irrelevant or manifestly unsubstantiated” from the arbitral tribunal's legal point of view.

The same applies to the legal submissions of a party. The Federal Court of Justice (I ZB 36/21) held that there was a violation of the right to be heard in a case where the sole arbitrator postponed the oral hearing for only one week, although the claimant’s lawyer was still in hospital with a serious illness for six weeks according to a medical certificate. The oral hearing took place in the absence of the claimant and his claim was dismissed in the award, while the counterclaim was successful. The Federal Court of Justice considered the obviously erroneous rejection of the request to postpone the hearing, which resulted in a party not being able to properly exercise its right to make a statement due to the lack of legal representation, as a potential violation of the right to be heard.

However, unless justifiable reasons are presented for a request for the postponement of an oral hearing, as in the above case, the arbitral tribunal's refusal to postpone the hearing and a subsequent oral hearing without the party concerned does not violate the right to be heard (Munich Higher Regional Court, 34 Sch 32/19).

In line with the jurisprudence of the Federal Court of Justice, the Bavarian Higher Regional Court (101 Sch 60/21) assumed in enforcement proceedings of an English arbitral award that the testimony of the – allegedly central – witness had no relevance for the issues in dispute. It further rejected the objections that the arbitral tribunal had relied on an allegedly incorrect recording of the facts, had issued a surprise decision and had violated the principle of immediacy due to a period of approximately 16 months between the oral hearing and the arbitral award.

Ordre public

One of the few grounds to set aside an arbitral award is the violation of German public policy. In a case concerning the application of antitrust law, the Federal Court of Justice (KZB 75/21) held that the German state courts are allowed and obliged to fully scrutinise allegations of violations of antitrust laws reflecting German public policy. In the case at issue, the challenged arbitral award had held the second termination of a long-term quarry lease agreement to be lawful despite objections by the claimant under cartel law, which were shared by the Federal Cartel Office (Bundeskartellamt) with regard to a prohibited first termination.

Despite an assessment by the Federal Cartel Office submitted in the setting aside proceedings that the second termination was also in breach of cartel law, the Frankfurt Higher Regional Court (26 Sch 12/20) did not set aside the arbitral award and justified this with a limited standard of review. It held that, in light of the prohibition of a révision au fond, the review of the state court was limited to verifying “whether the arbitral tribunal’s application of the law is contrary to the fundamental value decision of the legislature expressed in the norm in question”.

The Federal Court of Justice rejected this restriction on the application of cartel law in arbitration proceedings and set out that every decision that violates a norm which, like the applicable German cartel law prohibition norms, regulates the fundamentals of state or economic life violates public policy because it is obviously incompatible with essential principles of German law. For the required obviousness, any misapplication of an antitrust law norm from the point of view of the courts is sufficient; the prohibition of a révision au fond of the award does not apply in relation to core antitrust rules.

M&A disputes before DIS arbitration tribunals

Strict confidentiality is a central reason for concluding arbitration agreements. Therefore, DIS arbitral awards may not be published without the consent of the parties. However, as most disputes in the M&A sector in Germany are conducted as arbitration proceedings, most decisions in this important area are not available to the public. This makes it difficult for the parties and their counsel to predict the outcome of their dispute, and also impairs the further development of the law. A DIS working group has now evaluated more than 100 post-M&A arbitral awards and examined their potential to further develop the law. The evaluation of the arbitration awards has been published, which contributes to greater transparency in this highly relevant field.

Investor-state disputes

Germany is a signatory state of the EU Agreement for the Termination of Bilateral Investment Treaties between Member States of the European Union. The Agreement is a consequence of the Achmea decision by the European Court of Justice (CJEU) on 6 March 2018 (C-284/16), which ruled that the investor-state arbitration clause in the Netherlands-Slovakia bilateral investment treaty was incompatible with EU law, as it impaired the CJEU’s exclusive jurisdiction to interpret EU law and thereby undermined the principle of autonomy of the EU. The Agreement entered into force on 29 August 2020. As it explicitly does not apply to proceedings under the Energy Charter Treaty (ECT), stating that the member states will deal with this matter at a later stage, it remains to be seen how arbitral tribunals in pending and future arbitrations under intra-EU bilateral investment treaties will react to the Agreement.

In the context of investment arbitration, European states increasingly use the mechanism of Section 1032(2) of the ZPO, which provides that, until the arbitral tribunal is constituted, an application may be made to a state court for a declaratory decision on the (in-)admissibility of arbitral proceedings. In 2021, the Netherlands applied to the Cologne Higher Regional Court for a declaration that the ECT-based ICSID proceedings initiated by UNIPER and RWE respectively, in which the two energy companies sought compensation for the Netherlands' early phase-out of coal-fired power generation, are inadmissible. The rules of the World Bank agreement signed by Germany and the Netherlands to create ICSID provide for an autonomous dispute resolution system insulated from the intervention of state courts. In particular, the decision on its jurisdiction is the sole responsibility of the arbitral tribunal, whose decision can be reviewed within the ICSID system by an Annulment Committee. Nevertheless, in September 2022 the Cologne Higher Regional Court (19 SchH 14/21, 19 SchH 15/21) declared the court proceedings to be admissible under Section 1032(2) of the ZPO, stressing the principle of the primacy of EU law and its protection, and granted the application.

Shortly before, the Berlin Higher Regional Court (12 SchH 6/21) had taken a different approach in a case in which several companies belonging to an Irish group complained that Germany had changed its legislation on wind energy specifically for offshore installations. The Berlin Higher Regional Court found that Germany’s international treaty obligations prevailed over EU law in intra-EU disputes and declared the court proceedings initiated before it under Section 1032(2) of the ZPO not admissible.

The decisions have been appealed to the Federal Court of Justice (I ZB 43/22, I ZB 74/22 and I ZB 75/22); a decision is expected in 2023.

Following the Berlin Higher Regional Court’s decision, in June 2022 the ICSID arbitral tribunal rejected Germany's requests to stay the ICSID proceedings pending the Federal Court of Justice’s decision or to split them into admissibility and merits phases. However, in February 2023 the ICSID tribunal allowed the EU Commission to intervene. According to the ICSID arbitral tribunal, the interpretation of Article 26 of the ECT in the intra-EU context was covered by the subject matter of the dispute and the EU Commission would have an interest in setting out its view on the relationship between EU law and the ECT. However, the ICSID tribunal limited the length and scope of the EU Commission’s submission and denied it access to the case file and participation in the oral hearing.

In December 2022, Germany, France and Poland initiated the process to withdraw from the ECT, which will take effect for Germany on 21 December 2023. On 7 July 2023, the European Commission issued its proposal for a Council decision on the withdrawal of the European Union from the ECT. However, according to Article 47(3) of the ECT, the provisions shall continue to apply for a period of 20 years from the date the withdrawal takes effect. In view of this sunset clause, further claims by ECT investors are to be expected under the ECT in the future.

Possible increase in arbitration proceedings due to sustainability and ESG-related disputes

A fast-growing trend is the focus on sustainability and ESG issues. Globally, both the public and private sectors have announced plans to reduce their carbon footprint and invest in sustainable projects. Many states have made commitments under climate, environmental and human rights treaties. Trade and investment agreements are entered into to promote sustainable goals, such as the EU–UK Trade and Cooperation Agreement, which commits the parties to respect the Paris Agreement, to refrain from acts or omissions that would materially impair its object and purpose, and to encourage other countries to reduce their greenhouse gas emissions.

The European Commission’s “Fit for 55%” legislative package aims to achieve a 55% reduction in carbon emissions by 2030 and net zero by 2050. The proposed EU Supply Chain Directive will impose human rights due diligence obligations on companies operating in the EU.

This proposed directive provides for an even broader scope of applicability than that of the German Supply Chain Act, which entered into force on 1 January 2023. The Supply Chain Act sets out due diligence duties to respect human rights and the environment in global value chains, including the requirement of a risk management system, regular risk assessments, a policy statement on the company’s human rights strategy and a complaints procedure. The Act applies to all industry sectors and to companies with 3,000 or more employees (or 1,000 or more employees from 1 January 2024), provided that the company’s administrative centre, head office, headquarters, place of effective management, economic domicile or statutory registered office is located in Germany. The Supply Chain Act also applies to branch offices of foreign companies that have reached or surpassed the above-mentioned employee numbers. These due diligence duties apply primarily to the company’s own business operations and with respect to direct suppliers. Failure to comply with these due diligence duties is punishable by considerable fines. The act does not provide for any civil law liability.

Due to increasing pressure from regulators, investors and stakeholders, EGS-related contract clauses are being introduced in many contracts as well as EGS-related codes of conduct – for example, for the company’s suppliers. Arbitration clauses are included in many energy, natural resources, infrastructure and construction contracts to settle disputes related to climate change. Disputes may arise from contracts that aim to meet specific climate change targets or commitments. Also possible are disputes arising from contracts where the performance of the contract has been affected by the parties’ response to changes in national laws and regulations or the environmental impacts of climate change itself. Finally, disputes where the parties have agreed to submit to arbitration after the dispute has arisen are also to be expected.

Conclusion

The continuously positive attitude of the German courts towards arbitration and the current reform efforts of the German legislator suggest a continued positive outlook for arbitration in Germany.